Brownfield Investment

Brownfield Investment Definition

Brownfield investment is a form of FDI which makes use of the existing infrastructure by either merging, acquiring or leasing, instead of developing a completely new one, thereby saving costs and time in beginning the production.

Generally, any foreign government or a corporation looking for investing in a foreign asset has two routes, either invest through the securities market, in the form of Foreign Portfolio Investment (FPI) or through FDI. Within FDI, there are Greenfield and Brownfield modes.

In Greenfield, the investors start from scratch through obtaining land and building the plant on their own while in Brownfield they use an existing infrastructure either through purchase or through a merger with a local counter-part.

Example of Brownfield Investment

The Sugar Beach in Toronto, Canada is an example of Brownfield investment in which the pre-existing parking lot of Jarvis Street Slip was converted to a beach park on-looking lake Ontario. The beach site was redeveloped and opened to the public in 2010 at a cost of $14 million

The beach was redeveloped as a part of the ‘Toronto Waterfront revitalization initiative’ by the Minister of Infrastructure and Communities so that the underutilized or abandoned industrial sites could be put to better use and generate some revenue.

Apart from leisure and recreational activities, the beach also hosts an annual movie festival hosted by the Toronto Port Authority.

Other such initiatives by the same authority have to lead to the development of Sherbourne Common, Simcoe Wave Deck, and Corktown Common.

Benefits

Time-saving: As the investor doesn’t need to build the infrastructure, the time taken to initiate production is reduced

Local Intelligence: In case of a merger with a local company, the benefits of local knowledge adds to the advantage of the investor as they don’t need to do the ground-level research in understanding the local needs and requirements.

Boost to the local economy: Due to quicker initiation of production, the local economy boosts quickly from increased jobs and increased GDP

Environmental benefits: The local environment betters as the investor helps in cleaning up a hazardous waste of past industrial activities which would end up getting deteriorated if left neglected. This is done in the case of the Brownfield redevelopment process, where the land previously used for some other purpose is redeveloped for a new use and therefore helps in better aesthetics and community environment to live in.

Renovation: Old dilapidated buildings get renovated and therefore it leads to a reduction in the risk of their falling apart and causing a loss of life and property.

Drawbacks

Local regulations: At times when the investment takes place in emerging economies, the local regulations are less liberal as compared to that of the developed economies leading to a lack of ease in doing business.

Outdated facility: At times the abandoned facility has lower utility for the new production to be undertaken and therefore may become a hurdle in the optimum level of production. It may cost almost the same to redevelop the Brownfield land as it might to make a greenfield investment.

Repatriation laws: In the case of several emerging economies, the local repatriation laws are highly restrictive leading to a lack of amount of profits that can be taken back to the country of the investor and therefore the investor requires ample avenues to locally utilize the profits. This can reduce the willingness of the investor to invest in the country

Cleanup Costs: Even though cleanup of pre-existing hazardous or contaminated waste is a benefit for the local community, the costs are borne by the investor, which is an added disadvantage, however, it is a trade-off between a complete development or redeveloping the existing facility.

Brownfield vs Greenfield Investment

Nature of investment: In Greenfield investment, the investor constructs a completely new facility on a vacant plot of land while in Brownfield investment, the existing facility is either used as it is or is redeveloped for the new production, which may be in the same industry or may require a complete change of usage

Efficiency: As Greenfield projects a customized according to the use in which they will be put to, they take care of all kinds of efficiency hazards at the planning stage, therefore the production levels are optimum in such projects in most cases. As Brownfield projects redevelop existing facilities, there may be restrictions to the amount of redevelopment that can be done suiting to the requirements of the new production, therefore this could become a hurdle in the efficiency of the project

Cost: Greenfield projects require greater investment as compared to the Brownfield projects as all that the investing company gets in the land, and the entire construction is newly undertaken while in case of Brownfield, some projects may initiate by making minor modifications to the existing facilities

Time: Greenfield projects require greater time as compared to the Brownfield projects for the same reasons as its costs are higher

Cleanup costs: Greenfield projects don’t incur any cleanup costs, however, the Brownfield investment site may be contaminated due to prior usage or may even have hazardous waste disposed at them which require cleaning up and therefore cleanup costs are incurred.

Risk of failure: Greenfield projects have a higher risk of failure as compared to the Brownfield investments because they incur larger costs and therefore if these projects fail, they lead to a larger amount of loss.

Conclusion

Brownfield Investment is a type of Foreign Direct Investment (FDI) in which a foreign investor merges, acquires or leases a pre-existing plant and uses the same for the production of a new product resulting in saving the time taken in building a new facility. This may be an advantage for those who may not have to modify the existing facility too greatly for their purpose, otherwise, the redevelopment may become highly costly.

Cleanup cost of contaminated regions might become one of the biggest costs to the investors and a great advantage to the local community so this needs to be considered before making such an investment.

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